Is now time to fix?

Bruce Brammall, The West Australian, 23 October, 2023

It’s kinda nice to hear a big bank boss have a bit of a bitch about his competitors.

Accusing them of writing “uneconomic” loans that were “destroying value”, Commonwealth Bank’s Matt Comyn last week admitted he’d lost market share during a pricing war earlier this year.

“Oh, that’s so sad for the banks.” Said no-one. Ever. ’Cept for maybe a few shareholders.

In hindsight, that was great news for those who were hunting for a new mortgage at the time, when ANZ and Westpac (the alleged culprits) were engaged in the price gouging.

Also for those who regularly negotiate with their banks to get better deals. Arguably, everyone should do that, or ask their broker to.

Interest rates are starting to die down as a topic of conversation at the pub, or around the water cooler.

Why? It’s nearly five months since the last rate rise. And while the dramatically higher monthly mortgage repayments don’t hurt any less now than when the last rise got passed through for most in July, there has been a few months for homeowners to re-learn to breathe.

(I’m not predicting that there won’t be more to come. Inflation remains high and unemployment low.)

To fix, or not …

Just before the last Reserve Bank rate rise in June, an interesting thing happened with fixed rates. Two- and three-year fixed rates fell below variable rates for the first time in about 18 months.

When fixed rates hit their ridiculous lows of below 2 per cent during 2020, Australians obviously flocked into them.

And despite the pain being felt now … no, that doesn’t mean you dive in and fix rates.

Lesson from history, for those too young to remember.

The market crash that led to the Global Financial Crisis started in November 2007. Official interest rates were rising at the time and kept rising through until March 2008 when they hit 7.25 per cent (by comparison, we’re at 4.1 per cent now).

A lot of homebuyers were seriously stressed. The consensus was there were potentially a lot more interest rate rises to come, off the back of the monster share market bull run that (we found out later) had recently ended.

Thousands of Australians fixed at rates above 7.5 or even 8 per cent, desperately trying to stem the pain and beat fear that interest rates would continue to rise. They had only gone up for the previous six years (since May 2002).

The GFC unfolded through the rest of that year. And between September 2008 and April 2009, the RBA cut rates from 7.25 per cent to 3 per cent in the biggest emergency cutting in modern history.

Many fixed for five years, paying 8 per cent interest rates through until 2013. Rates over that period averaged about half of that.

Gamble wisely

Fixed interest rates serve a purpose. But they aren’t something that you should generally try to use to “beat” the banks.

Banks set fixed rates based on where they estimate the average of interest rates will be over that period – be it two, three or five years. And then add a margin.

Generally, over the course of a loan, borrowers will be better off on a variable rate for the life of the loan. The difference is estimated to be about 0.2 to 0.3 per cent.

But there are good reasons for taking on a fixed rate, even if it means that you’re likely to pay a bit extra.

They include giving you certainty for a period when you might need it, such as going back to one income, or feeling uncertain about some parts of your future. You know what your repayments will be for a defined period, making budgeting easier.

Fixed rates rarely make sense when you’re deep into a rate rising cycle, as we are now.

Between the June quarter of 2020, as Covid was wreaking havoc, to around Christmas 2021, more than a third of all mortgages written were for fixed rates. Now? It’s been an average of about 6-7 per cent since the June quarter of 2022.

In recent years, most Australians seem to have instinctively got when it’s a been a good time to fix, and when it hasn’t.

Until the next opportunity, take advantage of the competition and make a few more bank bosses moan.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.